How the Ikea Effect can help investors

Anyone who has ever built a cupboard themselves knows that it is difficult to part with. Does that also apply to the self-made share depot? A study on how to avoid panic selling provides interesting results.

Do it yourself: The Ikea effect can also be helpful for investing.

BBefore we get to the Ikea effect, take a look at the current market situation – because it plays an important role in the topic: Germany’s most famous stock market index, the Dax, has exceeded the 15,000 point mark for the first time in its history. In America, too, the stock markets have been in good mood for months. Actually everything is being bought at the moment. Shares, gold, Bitcoin and one or the other Spac, i.e. an empty shell, also enjoys the money from private investors.

Even if we still feel the corona pandemic and its consequences in everyday life – the topic seems to be (already) ticked off on the stock exchanges. After all, there are apparently plenty of good arguments for many investors that the markets will continue to move higher. There are, for example, the central banks: the American Federal Reserve and the European Central Bank keep key interest rates low.

Then there is also the new American President Joe Biden, who should keep the markets on course with a billion dollar economic stimulus program. As an investor, one only partially comes up with the idea of ​​what would happen if prices could (at some point) decline.

Panic and timing

Just in this current stock market situation, a new interesting study comes to light that deals with when investors should part with their equity positions – and when not.

As a matter of fact, every investor knows: stocks should not be sold when prices have reached a low. But when prices get into severe turbulence, most investors very often forget this truism, and in the end, because of the hasty sale, the bottom line is a loss. There are plenty of studies that show that investors who have suffered large losses with equity positions first refrain from making a new investment in securities or only venture into a new position with a smaller sum.

This deprives them of a solid strategy of asset accumulation and of their own retirement provision, especially in phases of low interest rates, because stocks are still a good lever to increase their own wealth in the long term. This reluctance, however, also damages the entire market and the stock culture, because the group of these frustrated investors withdraws from the stock market and is thus lost. In addition, frequent panic selling in times of crisis naturally also accelerates the downward spiral in prices.

What stocks and cabinets have in common

This is where the study “Nudging against panic selling: Making use of the Ikea effect” by Marc Oliver Rieger, Professor at the University of Trier and his co-authors from the University of LUISS Guido Carli in Rome and Commerzbank Luxembourg comes in.

Our author Christoph Scherbaum is a stock exchange specialist and works as a financial journalist from Ludwigsburg.
Our author Christoph Scherbaum is a stock exchange specialist and works as a financial journalist from Ludwigsburg.: Image: Christoph Scherbaum

Based on the so-called Ikea effect, the scientists propose a process that increases the willingness of investors to hold onto blocks of shares in times of crisis and to reduce panic sales. Because despite the often damaging effects of panic selling, they believe that so far only strategies have been designed to reduce losses in the event of a stock market crash. “Effective methods for avoiding or minimizing panic selling have not yet been available,” says the study.

The so-called Ikea effect, in turn, says that people attach greater value to things and develop a closer bond with them if they have created them themselves or worked on them. It is more difficult for people to part with a piece of furniture that they have assembled themselves.

In an experiment with 219 participants, the economists also confirmed this Ikea effect when dealing with stocks. For this purpose, the participants were divided into two groups. The first half had the task of putting together its own equity portfolio from four of eight regions worldwide for a long-term investment. The other half did not have this option, but had to be content with a portfolio that a financial advisor had recommended.

In the next step, the participants were then confronted with a stock market crash and their behavior was evaluated taking into account other variables such as gender, stock market experience or economic knowledge. The result: Investors who were allowed to put their portfolio together independently were more resilient to panic selling and were more likely to hold onto them in the event of a simulated price collapse.

“It is usually advisable to entrust the choice of a stock portfolio to an expert. The results of our experiment show, however, that it can be worthwhile to put your investments together yourself, ”says Professor Rieger from the University of Trier. In the end, the study should encourage all those who rely on solid value stocks and defensive growth stocks when building their wealth and avoid common investor mistakes such as being in love with the industry or exclusively following megatrends. Then your own portfolio should be just as fun as the self-assembled cupboard